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UBS pegs Puerto Rican bet at $41 million

UBS AG has put a cost on its brokerage's bet on Puerto Rico — $41 million.

In its third-quarter earnings report released Tuesday, UBS said it took a $20 million trading loss and $21 million in credit losses connected to loans that were backed by Puerto Rican municipal securities and "related funds."

The trading loss reflects provisions UBS made to continue providing liquidity to clients in that U.S. territory's bonds as they declined in value, according to UBS spokesman Gregg Rosenberg. Mr. Rosenberg said the company also made lending facilities backed by Puerto Rican debt available to its wealth management clients, and the credit losses reflect the diminished value of that collateral.

“In our view this is a market issue and not a UBS issue,” Mr. Rosenberg said.

A UBS unit, UBS Financial Services Inc. of Puerto Rico, is the subject of arbitration by investors who say they were sold highly leveraged closed-end funds by the unit's registered representatives and brokers but then took major losses.

The UBS Puerto Rico family of funds consists of 14 closed-end funds sold exclusively through reps and brokers with UBS Financial Services Inc. of Puerto Rico. According to marketing materials, UBS had sold more than $10 billion of the closed-end funds through the end of 2012.

Overall, trading income at UBS Wealth Management Americas dropped nearly 23% in the period to $94 million, but the brokerage nonetheless delivered to its Swiss parent a $218 million pretax profit. Net income was down 11% from the second quarter, but up 32% from the third quarter of last year, driven by interest, fees and commissions on client balances lifted by strong market performance.

Client balances at the wealth management firm now stand at $969 billion, including $2.1 billion in new assets from clients, lower than the $2.8 billion in the second quarter because recruited advisers brought smaller books of business, UBS said.

The nation's fourth-largest brokerage increased adviser head count by 38 in the quarter to 7,137, and joined competitors Morgan Stanley Wealth Management and Bank of America Merrill Lynch in claiming historically low attrition rates.